In October 2007, CFOs were feeling good. The stock market was at an all-time high, profits were growing, and excess cash was held with well-established banks. Sure, Wall Street experts warned that the bubble would have to pop eventually, but what was the worst that could happen?
The Great Recession happened. In the space of just a few years, banks that had been around for decades – or even nearly a century like M&I Bank in Milwaukee – failed. Businesses who kept their reserve cash with a single financial institution risked losing millions when banks collapsed.
The key to avoiding losses during a catastrophe like the 2008 crash is simple: diversify. In real estate, they say the three most important words are “location, location, location.” In finance, the three most important words are “diversify, diversify, diversify.” But how do companies apply this principle to their cash reserves?
Diversifying Deposits Helps Protect Assets
The fact that a bank has been around for years doesn’t mean it is immune to failure in the next economic downturn. The best way to protect corporate cash reserves is to spread them across many different banks. That way, if one fails, only a small portion of a company’s deposits are affected.
When a company spreads its deposits across multiple FDIC insured banks – or NCUA insured credit unions – they can access extended government protection. The FDIC and NCUA are backed by the full faith and credit of the U.S. government and these agencies insure deposits against the failure of the financial institution. However, this insurance is limited to $250,000 per account ownership category at each insured financial institution. By spreading deposits among a diverse network of banks and credit unions, businesses can achieve coverage for all their funds.
Diversifying Deposits Helps Build Relationships to Meet Future Needs
As a business changes, its investment needs evolve. What’s working now may not work five or ten years down the road.
Some companies keep their cash reserves liquid to meet operating expenses or fund ongoing projects. In this case, checking accounts, savings accounts, or money markets may be appropriate options. However, longer-term projects could require a different type of account. Funds earmarked for an expansionary project in ten years usually don’t need immediate liquidity, so Certificates of Deposit [CDs] could be a better option. Additionally, a company engaging in a long-term project that requires liquidity on a set schedule over several years could benefit from a CD ladder.
Most banks and credit unions offer checking, savings, and money market accounts as well as CDs. But a company may not be able to get competitive rates on all these accounts at just one institution. Additionally, professional assistance managing more complex strategies like blending account options to create the optimal mix of liquidity and returns, or crafting an effective CD ladder, may not be available at a local bank. Relationships with a diverse network of banks can help businesses access the accounts they need and the returns they want.
Diversifying Deposits Can Help Prevent Fraud
If a company keeps all their deposits in one place, with one dedicated person to manage the account, it can open the door to internal theft and fraud. An example hits close to home in Milwaukee. The VP of Finance at Koss Corp., the maker of those iconic headphones, embezzled $31 million from her employer of 15 years by making fraudulent wire transfers from bank accounts owned by Koss Corp. She spent that money on shopping and lavish vacations.
The more third parties review a company’s funds, the more likely they are to catch fraudulent activity. With multiple banking relationships, and a professional cash management company overseeing a business’ deposits, it is easier to spot missing money before it turns into a multi-million-dollar problem.
Diversification of cash reserves can help businesses access extended protection, achieve more competitive rates, access the types of accounts they need, and prevent fraud. In the past, achieving diversification was a time-consuming task. But with advances in financial technology – or fintech – it is easier than ever.
Diversify Deposits with Marketplace Banking™ by ADM
Opening accounts at diverse banks across the country can be done by a company’s finance and accounting team, but it takes a lot of legwork. For example, one of our clients had accounts at 144 banks before they worked with us. Their CFO would scour the papers for the best rates over the weekend, call the banks during the week to negotiate rates, and do the same thing all over again the next week. That took valuable time out of his days that he could have spent on more important tasks.
Marketplace Banking™ is built on a simple principle – provide our clients with access to extended deposit protection, nationally competitive rates, and liquidity that matches their needs. Our proprietary fintech connects a nationwide network of financial institutions seeking deposits with businesses that need extended protection and competitive returns.
At the American Deposit Management Co. [ADM], we take the stress out of deposit management. With Marketplace Banking™, we open the accounts, find competitive rates, negotiate with the banks and credit unions in our network, and give businesses one monthly statement (as opposed to 144 statements from 144 banks). To learn more or get started, contact us.